On the eve of the 2019 elections, just four months away, a “Great Agrarian Distress” is staring head on in the face of both the ruling BJP government and the opposition Congress, even as the agricultural production of the country as a share of the GDP is fast dwindling. Farmers are committing suicides in many states unable to pay back their loans as the cycle of drought catches up with them with no crop yield.
An aggressive Congress led by the equally belligerent Rahul Gandhi has as a first step after winning the three Hindi heartland states of MP, Rajasthan and Chhattisgarh have rushed like moth into candle flame to write off the loans of farmers in distress to fulfil an election pledge.
But the agrarian distress is not as simple as it seems, but far more complicated. Political parties have only touched the tip of the iceberg. The cycle of droughts, faulty implementation of distribution of seeds to farmers, corruption in such a system. that most loans are taken by small farmers from usurious money lenders ( see Mother India the iconic movie) who charged interest on interest so that the principal becomes unpayable by the farmers, leading to suicides . only a small percentage of farmers get the facility of loans from agrarian banks but that too adds up to a lot in the budget of a state.
Let’s look how states are going to manage their finances for other social welfare projects in the light of farm loan waivers.
Let’s delve into history a bit. What is a loan waiver – the correct definition is the waiving of the real or potential liability of the person or party, who has taken out a loan through the voluntary action of the person or party who has made the loan. Even the mighty United States has a loan waiver scheme called the Stafford Loan Forgiveness program in the United States and the Agricultural Debt Waiver and Debt Relief Scheme in India.
Stafford Loan Forgiveness — In certain situations, the United States Federal Government can waive all or a part of an education loan through the Stafford Loan Forgiveness program. Eligibility for the program depends on the borrower meeting certain service criteria after they have completed their education.
Loan waivers for generally in respect of farmers are distinctly unique to India. Economists have generally regarded this to be a populist and fiscally risky measure that can cause long term problems. Even though, the Loan Waivers can constitute a significant fraction of the GDP, it can put a lot of stress on states finances.
The first nation-wide farm loan waiver was implemented in 1990 by Janata Party government led by then Prime Minister V.P. Singh and cost the government Rs 10,000 crores.
A number of farmers’ agitations on loan waivers had literally forced political parties to write off loans in the interest of preserving this large share of their vote banks for their electoral politics..
Loan waivers include the following.
2008 Agricultural Debt Waiver and Debt Relief Scheme in India]
On 29 February 2008, P. Chidambaram, at the time Finance Minister of India, announced a relief package for bestiality farmers which included the complete waiver of loans given to small and marginal farmers. Called the Agricultural Debt Waiver and Debt Relief Scheme, the 600 billion rupee package included the total value of the loans to be waived for 30 million small and marginal farmers (estimated at 500 billion rupees) and a One Time Settlement scheme (OTS) for another 10 million farmers (estimated at 100 billion rupees).During the financial year 2008-09 the debt waiver amount rose by 20% to 716.8 billion rupees and the overall benefit of the waiver and the OTS was extended to 43 million farmers.In most of the Indian States the number of small and marginal farmers ranges from 70% to 94% of the total number of farmers, according to official information available ( posted on wiki).
The Agricultural Debt Waiver and Debt Relief Scheme was initiated by the United Progressive Alliance (UPA) government that faced sharp criticisms from many groups including the opposition parties in the Indian Parliament, agricultural experts, and bankers. Critics said that the loan waiver was simply a populist move by the UPA Government in view of the forthcoming elections.
Says Parshuram Ray, director of the New Delhi-based Center for Environment and Food Security, the loan waiver was “an electoral sop that involves a lot of statistical jugglery and very little of real hope for Indian farmers.” An important feature of the program which has been heavily criticized is that it covers only formal sources of credit and excludes any kind of informal loan. Thus, while it benefitted wealthy and large-scale farmers, who had access to institutional credit (about 23% of the total number of farmers), small and marginal farmers, who borrow the majority of their funds from private moneylenders, would not benefit from the scheme. Another criticism of this scheme was that it might cripple the agricultural credit system.
History is repeating itself in 2018 after the 2014 Telangana and Andhra waivers.
- In 2014, Telangana waived Rs. 17,000 crore in loans to 3.6 million beneficiaries.
- Also in 2014 Andhra government provided 4.9 million farmers families.
2017 India’s Farm Loan Waivers in India
In 2017, at least four states Uttar Pradesh, Maharashtra, Punjab and Karnataka, announced farmer loan waivers, with estimated cost of about US$13.6 billion. Experts project that if the loan waivers are implemented nationally will cost about 2–2.6% of GDP (US$40–50 billion). The RBI opposes the loan waivers. The waivers hurt India’s public sector banks which are already under stress. Many farmers in other states have stopped paying loans and are withdrawing deposits from banks in anticipation of waivers. In some states, the default rate has increased to 50% – 60%, official information available indicate.
Exploitation of Loan Waivers
In Punjab, farmers are depositing their income in other banks and avoiding the lending banks. They are expecting a loan waiver because of the upcoming 2019 General Elections.In Madhya Pradesh, farm loan repayment dipped by 10% with some farmers expecting a change in the ruling party and expected loan forgiveness by the opposition Congress party, which did happen wth the Congress coming to power after 15 years.
Who bears the cost?
According to a Karnataka report, for loans taken from Cooperative banks Nationalized banks, the state is responsible for paying the interest and the principal. The loans taken from private moneylenders will be simply nullified.Urjit Patel, governor of the Reserve Bank of India had stated that “.. farm loan waivers leads to crowding-out of private borrowers as high government borrowing tends to increase the cost of borrowing for others.” He said that waivers could eventually affect the national balance sheet.
Who are the Beneficiaries of Loan Waivers?
Studies show that big and mid-size farmers are the ones who gain the most from farm loan waivers. Scholars point that the loan waivers during the one loan cycle prompt banks to reduce credit outlay for small or marginal farmers during the next loan cycle.India Braces For Surge In Populist Farm Loan Waiver Schemes ahead of the 2019 general elections to parliament. Congress s has written off loans in three states – MP, Rajasthan and Chhattisgarh – even before presenting the budget proposals for the state assemblies.
A backdrop of low food prices and concerns of distress in the agrarian economy have further emboldened political leaders to call for such loan waivers, which weaken state finances and hurt banks by impacting future loan repayments, says Vishwanathan, an expert on agrarian economy.
In the past week alone, three Indian states — Assam, Chhattisgarh and Madhya Pradesh — have announced schemes to waive farm loan. They join a growing list of state governments which have resorted to such waivers in the past two years.Since the start of 2017-18, ten states have announced farm loan waivers amounting to nearly Rs 1.7 lakh crore, data compiled by BloombergQuint, an indo-us news agency initiative reveals.
With states adopting loan waiver schemes mindlessly without taking into account the stress on a state’s financial reserves , the call for a nation-wide farm loan waiver has begun to rise as , CongressChief Rahul Gandhi, on Tuesday, said that if the party is elected at the centre in 2019, it would waive of all farm loans. Gandhi also said that he “won’t let the Prime Minister sleep” till a nationwide farm loan waiver is announced.The last time a nationwide farm loan waiver was announced was in 2008, when the Congress-led government had waived Rs 52,260 crore in farm loans.
Banks Brace for Impact
RBI data available as on Oct. 26 2018 reveals that outstanding credit to agriculture and allied services stood at close to Rs 10.6 lakh crore. The RBI data on sectoral deployment of bank credit further reveals that as such, the state loan waivers announced so far account for about 16% of the outstanding agriculture loans.This is already close to the proportion of loans waived at the time of the nationwide loan waiver in 2008. Then, Rs 52,260 crore in farm loans waived were about 18% t of the total agricultural credit portfolio, an SBI Research report dated Dec.12 reveals.
In a report dated Dec.12, Macquarie Research also noted that bad loans in State Bank of India’s agriculture loan portfolio shot up after past loan waivers. SBI’s agriculture bad loans shot up from 6.4% before Uttar Pradesh announced its loan waiver to 11.4% as of September 2018, the research house noted.SBI’s farm loan NPLs (non-performing loans) have been rising steadily over the years post farm loan waivers.
NPLs rose sharply after the 2008 nationwide waiver and after the waivers announced by the UP and and Maharashtra governments.
The fundamental problem is that we have way too many people dependent on agriculture. Our employment generation in the manufacturing sector has been poor. It is even poorer now than it was under the UPA (United Progressive Alliance) government. The previous Congress government doesn’t deserve much credit for thinking clearly on education and healthcare, but they did generate more employment than the present Modi government seems to be doing.” In fact, there seems to be an amazing lack of interest”, says Amartaya en.
T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs.